Chapter Two Fair value measurement and Impairment

Illustration (1): At December 31, 2019, General Ltd. has equipment with a cost of $26,000,000, and accumulated depreciation of $12,000,000, after the current year’s depreciation has been recorded. The equipment has a total useful life of four years with a residual value of $2,000,000. The following information relates to this equipment.

1. 
   Hanoi has determined that the recoverable amount for this asset at December 31, 2023, is $11,000,000.
   
2. 
   The remaining useful life of the equipment after December 31, 2019, is two years. Hanoi records the impairment on its equipment at December 31, 2023, as follows.
   

Loss on Impairment ($14,000,000 − $11,000,000)	3,000,000
Accumulated Depreciation—Equipment		3,000,000

Following the recognition of the impairment loss in 2019, the carrying amount of the equipment is now $11,000,000 ($14,000,000 − $3,000,000). For 2020, Hanoi determines that the equipment’s total useful life has not changed (thus, the equipment’s remaining useful life is still two years). However, the estimated residual value of the equipment is now zero. Hanoi continues to use straight-line depreciation and makes the following journal entry to record depreciation for 2020.

Depreciation Expense ($11,000,000 ÷ 2)	5,500,000
Accumulated Depreciation—Equipment		5,500,000

Hanoi records depreciation in the periods following the impairment using the carrying amount of the asset adjusted for the impairment. Hanoi then evaluates whether the equipment was further impaired at the end of 2020. For example, the carrying amount of Hanoi’s equipment at December 31, 2020, is $5,500,000 ($26,000,000 − $12,000,000 − $3,000,000 − $5,500,000). If Hanoi determines that the recoverable amount at December 31, 2024, is lower than $5,500,000, then an additional impairment loss is recorded.